Labour manifesto clamps down on tax avoidance, introduces VAT on private schools and signals review of pensions

Labour’s manifesto is billed as focusing on ‘wealth creation’ but the overall approach is ‘safety first’ and there are concerns that state pensioners could get taxed.

Right hand posting paper into a ballot box
Jason Hollands
Published: 14 Jun 2024 Updated: 14 Jun 2024

The Labour Party revealed its manifesto ahead of the General Election on 4 July this week. In this article, we look at its finance-related pledges and how they can affect you:

What’s the overall view on Labour’s manifesto?

Labour say their manifesto focuses on ‘wealth creation’ but some view it as a ‘safety first’ approach as it avoids any startling or unflagged policy initiatives, particularly around taxation. It’s minimalist compared to the Conservative’s more comprehensive effort to address fiscally sensitive matters earlier this week.

Labour have a commanding lead in the polls and so care is being taken not to jeopardise this with new radical plans that could unnerve undecided voters and disgruntled Tories.

How would a Labour government raise money?

Labour has vowed not to raise income tax, National Insurance or VAT but this has created suspicion about which other areas could be vulnerable. Capital gains tax, inheritance tax and the tax-preferential treatment of pension saving have all been mooted as targets for a government that may need to raise revenues down the line.

There was no mention of raising tax in these areas in their manifesto but it’s unrealistic to expect a party to rule out tax rises across the board.  The scepticism of independent forecasters on both leading parties’ public finance projections is feeding suspicions that at some point taxes will have to be raised from somewhere.

There are reasons why Labour might want to keep quiet about where it might source additional revenue. If, for instance, it pre-announced a rise in capital gains tax it could lead to a rush by some investors to dispose of assets.

All eyes will be on the next government’s first big fiscal statement, which is likely to be an autumn Budget, which could provide some clues as to where they are likely to increase taxes, if at all.

VAT on private schools

Labour aim to raise £1.5 billion from applying VAT and business rates to private schools. Labour confirmed this policy a while back and the debate as to its likely effects has been raging ever since.

Most private schools – who are facing pressure from rising wage and pension costs - will not be able to absorb the imposition of VAT at 20% and will pass this onto parents. It’s likely to make a private education unaffordable for most middle-class families, even where earnings are high and more children will end up in state schools instead.

A 20% hike would be a final deal-breaker for many thousands of families. A recent survey by Bains Cutler suggested that as many as 42% of the total number of children currently in fee-paying places could be taken out of their schools and into the state system over the next five years.

It means that private education will become the preserve of the wealthiest families and, increasingly, high net worth overseas parents seeking the prestige of a British private education for their children. There’s the added danger that untold pressures are brought to bear on the best state schools.

Most private schools have been offering pay-in-advance schemes, enabling parents to pay for multiple years up front in the hope they can avoid VAT. However, the law could be changed to prevent this, by making the VAT applicable when the service is delivered rather than when its invoiced.

How will Labour address tax avoidance and loopholes?

Labour expects to raise £5.2 billion from ending the non-dom tax regime and investment in reducing tax avoidance, as well as £565 million from closing the ‘carried interest loophole’ in the private equity sector.

Figures shared by both parties on potential savings through closing the so-called ‘tax gap’ and cracking down on tax dodging have been labelled unrealistic by several think-tanks and tax experts.

In part this is about beefing up HMRC resources to investigate claims and crack down on avoidance, but there could also be a review into how tax reliefs are being used by savers, investors and households to pass on wealth.

Some quite legitimate tax reliefs tend to get portrayed as ‘loopholes’ when a government needs money, and it’s not unthinkable that they will look to water them down or get rid of them entirely.

For instance, Labour has already said that it thinks reliefs available to mitigate inheritance tax  are too generous, particularly business and agricultural reliefs. Although there are no tax increases explicitly proposed in these areas, we could see some movement in that direction in the next parliament.

Could Labour re-introduce the pension lifetime allowance?

Chancellor Jeremy Hunt abolished the pension lifetime allowance in April 2024 and Labour’s threat to reinstate it had been causing a lot of uncertainty, putting some savers’ plans into paralysis. However, there was no mention of reinstating the pensions lifetime allowance in the Labour manifesto.

But introducing other measures affecting pensions is not completely off the cards, as a new government could still alter the way pensions are taxed. For now though careful savers don’t have to worry that they will be penalised for growing well-invested pension pots and public sector professionals with gold-plated defined benefit schemes (also known as final salary schemes) will not be enticed into early retirement.

Will Labour retain the triple lock?

Labour has pledged to retain the state pension ‘triple lock’ – a formula that sees it rise each year by the higher of inflation, average wage growth or 2.5% - but stopped short of matching the Conservatives’ ambitious ‘triple lock-plus’.

It means the state pension - at its full rate of £11,502 a year could rise in line with or surpass the personal allowance (the amount of income which can be earned tax-free each year). This is currently frozen at £12,570 until 2028, a timeline Labour has said it will stick to.

The Office for Budget Responsibility (OBR) has forecast that the state pension will overtake the personal allowance level by 2027, which means pensioners will pay tax on their state pension. But if inflation or wage growth gives an unexpected boost to the state pension, this could happen sooner.

Investment in UK plc

Labour appear more willing to try and direct private capital to investment in British companies and achieve environmental obligations. Its manifesto says it will ‘act to increase investment from pension funds in UK markets’. Reforms will ‘ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC’ as well as 'a review of the pensions landscape’.

Labour also promises to 'make the UK the green finance capital of the world, mandating UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the 1.5°C goal of the Paris Agreement’.

This more interventionist role in directing private capital – such as that from pension schemes – could well provide a boost to the UK stock market, potentially more so than a British Individual Savings Account (ISA) would. It’s unclear whether the eventual approach will be one of offering carrots – in the form of incentives - or wielding a regulatory stick.

What’s not in the manifesto?

Labour’s manifesto is minimalist, on tax policy at least, because they don’t want to risk ruffling any feathers quite yet.

Meanwhile, the Tory manifesto promises not to ‘introduce any new taxes on pensions’ and also not to increase capital gains tax. The Labour document does not make such pledges and this is sure to increase speculation over the coming months and may continue well beyond autumn if there are no further clues in the Labour Budget.

Some Labour politicians are keen to raise capital gains tax, but this could discourage risk taking and investment and be incompatible with the theme of supporting wealth creation, which is something that Labour is also trying to achieve.

We aim to keep all of our clients’ portfolios adaptable to any sort of change, including a new government. If you have any questions about the potential changes being made after the general election, if you should be taking action now or how to keep your finances flexible, book an initial consultation online or by calling 020 7189 2400, or speak to your usual Evelyn Partners contact.